What is APR and how is it different from interest rate?

APR (Annual Percentage Rate) represents the true yearly cost of borrowing, including the interest rate plus fees and other charges. The interest rate only reflects the cost of borrowing the principal, while APR gives a more complete picture by factoring in origination fees, closing costs, and other charges spread over the loan term.

Should I compare loans using interest rate or APR?

You should compare loans using APR when evaluating the true cost of borrowing, as it includes all fees and charges. However, if you plan to sell or refinance before the loan term ends, the interest rate may be more relevant since upfront fees are spread over fewer years in the APR calculation.

What fees are typically included in APR?

Common fees included in APR are loan origination fees, discount points, mortgage insurance premiums, closing costs, and broker fees. Some costs like appraisal fees, title insurance, and attorney fees may or may not be included depending on the lender and loan type. The Truth in Lending Act requires lenders to disclose the APR.

APR Calculator

Calculate the true annual percentage rate of a loan including all fees and costs.

Loan Amount ($)

Interest Rate (% p.a.)

Loan Term (years)

Total Fees & Costs ($)

Include origination fees, closing costs, points, etc.

True APR

Stated Interest Rate 0% Monthly Payment $0 Total Interest $0 Total Fees $0 Total Cost (Interest + Fees) $0 Total Amount Paid $0

Understanding APR vs. Interest Rate

When shopping for a loan, you will encounter two key numbers: the interest rate and the APR (Annual Percentage Rate). While the interest rate tells you the cost of borrowing the principal amount, the APR provides a more comprehensive picture by including additional costs such as origination fees, closing costs, discount points, and other lender charges. Federal law under the Truth in Lending Act (TILA) requires lenders to disclose the APR so borrowers can make apples-to-apples comparisons between loan offers.

How APR Is Calculated

The APR is computed by finding the interest rate that would produce the same monthly payment if the fees were rolled into the loan amount. Mathematically, it is the rate r that satisfies the equation where the present value of all monthly payments equals the net loan proceeds (loan amount minus fees). This calculator uses an iterative method (Newton-Raphson) to solve for the APR with high precision.

When APR Matters Most

APR is most useful when comparing loans with similar terms but different fee structures. A loan with a lower interest rate but high fees could have a higher APR than a loan with a slightly higher rate and no fees. However, if you plan to pay off or refinance the loan early, the upfront fees have a larger impact per year, making the effective APR even higher than the disclosed figure.

Enter your loan details above to see both the stated interest rate and the true APR side by side. The donut chart visualizes how your total payments break down between principal, interest, and fees.

Formula

APR is solved from: (P − Fees) = ∑ PMT / (1 + APR/12)^k for k = 1 to n

Where:

P = principal loan amount
Fees = total upfront fees (origination, closing costs, etc.)
PMT = monthly payment (based on stated interest rate)
APR = annual percentage rate (solved iteratively using Newton-Raphson method)
n = total number of monthly payments
k = payment number (1 through n)

The APR is the rate that makes the present value of all payments equal to the net loan proceeds (principal minus fees). Because it includes fees in the effective cost, the APR is always equal to or higher than the stated interest rate.

Example Calculation

Scenario: $20,000 loan at 6% stated rate, 3% origination fee ($600), 5-year term

Step 1: Monthly payment at 6% = $386.66 (based on full $20,000 principal)
Step 2: Net loan proceeds = $20,000 − $600 = $19,400
Step 3: Solve for APR where $19,400 = ∑ $386.66 / (1 + APR/12)^k
Result: APR = 7.15% | The 3% origination fee adds 1.15% to the effective annual cost

This calculator is for informational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified professional for decisions specific to your situation.